SHEBAA, Lebanon (Reuters) - For a Middle Eastern flashpoint, the Israeli-occupied Shebaa Farms appear placid.
A hilltop U.N. post looks south over green trees in a deserted valley ringed by a dirt road and a fence. No goats graze the dry yellow grass on the craggy limestone slopes above.
On mountain peaks a few km away, Israeli troops watch from fortified positions bristling with antennae.
Local Lebanese villagers insist the land has always been theirs, saying they have documents to prove it.
But the fate of this remote patch of land squeezed between Lebanon and the Israeli-occupied Golan is tangled up with indirect Syrian-Israeli peace talks, relations between Beirut and Damascus, and the future of Hezbollah as an armed force.
U.S. Secretary of State Condoleezza Rice said in June that "the time has come to deal with the Shebaa Farms issue."
Yet there has been no sign of a breakthrough on what has become the last big dispute between Israel and Lebanon since Hezbollah concluded a prisoner swap with the Israelis in July.
Faris Hamdan, a 42-year-old shepherd, said his family had lived on fertile farms in Shebaa before Israel captured the area in 1967 along with Syria's Golan Heights. "They grew wheat and lentils. They had figs, prickly pears, the goodness of God."
Hamdan, sitting with some of his nine children outside his house, said he would return there if he ever had the chance.
"In winter my goats can't live here but down there they can live," he added. "Olives don't grow here, but they do there."
Hezbollah fighters, who captured three Israeli soldiers on the dirt road in 2000, have not attacked the occupiers of the Shebaa Farms since their 2006 war with Israel. U.N. and Lebanese troops took control of the border region after that conflict.
Indian troops guarding the sector as part of the U.N. Interim Force in Lebanon (UNIFIL) have had to cope only with infiltrations by sheep, goats and the occasional herdsman.
"Incidents may take place of livestock crossing from one side to another. At times there are allegations of shepherds also crossing over," said the Indian commanding officer, Colonel Gurbir Pal Singh. "But those are few and far between."
A few meters north of the fence are blue-and-white U.N. barrels marking the hotly contested "Blue Line," drawn by the United Nations in 2000 when it ruled Israel had completed its pullout from Lebanon after a 22-year occupation.
Hezbollah challenged this, saying the Shebaa Farms belonged to Lebanon. The Shi'ite guerrillas cited the need to liberate it as one of the reasons they should remain armed.
Lebanon and Syria also contend that the 27 square km (10 square mile) territory is part of Lebanon, but they have not demarcated their borders. Damascus said this month the Shebaa Farms boundary could only be drawn once Israel withdraws.
After the 2006 war, the United Nations sent cartographers to review the conflicting claims, but their conclusions have not been made public since they completed their work last year -- a sign of the complexity and sensitivity of the issue.
During the conflict, the U.S.-backed Lebanese government -- seeking a diplomatic solution to trump Hezbollah's reliance on warfare -- proposed Israel turn the area over to temporary U.N. control until Beirut and Damascus could clarify its status.
Israel has brushed off the idea. In the past it has rejected Lebanon's claim to the Shebaa Farms, citing the U.N. view that they are part of the Golan Heights, which it annexed in 1981.
But Mark Regev, spokesman for Israeli Prime Minister Ehud Olmert, told Reuters that the territorial dispute can be raised in any future peace negotiations with Lebanon or Syria.
"We're willing to discuss in the framework of peace talks with Lebanon any issue they want to bring to the table.
"Obviously when we hold peace talks with the Syrians, and I hope we do have direct talks with the Syrians, then ultimately we have to agree to a border between our two countries, so both sides will put their territorial visions on the table," he said.
Israel and Syria have conducted indirect talks in Turkey this year, but full-fledged negotiations seem unlikely before there is a new U.S. president and fresh Israeli leadership.
Hamdan, the shepherd, said villagers had agreed to stay away from the Shebaa Farms out of respect for the U.N. troops, but were determined to get it back -- by force if diplomacy failed.
"If UNIFIL solves it, fine with us. If Hezbollah solves it, fine with us. In the end, we want our land," Hamdan said, wearing camouflage trousers and army boots.
The Shebaa Farms may be a symbol for Hezbollah's resistance to Israeli occupation, but in the nearby Sunni Muslim village of Shebaa, some are leery of relying on the Shi'ite militants.
"We don't want Hezbollah to liberate the Farms for us. We want the Lebanese state to liberate it peacefully," said Mohammed al-Masri, a 33-year-old businessman out shopping.
In contrast to most southern villages, no yellow Hezbollah flags fly here. Many shop windows carry portraits of a Sunni hero, slain former premier Rafik al-Hariri, and his son Saad al-Hariri, whose Future Movement is at odds with Hezbollah.
"We are against Hezbollah's presence here. What is important for us is legitimacy and the Lebanese army and UNIFIL," Masri declared. "We've had enough wars and killing."
Additional reporting by Allyn Fisher-Ilan in Jerusalem; Editing by Sara Ledwith